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Boeing profit falls 50 percent on production cuts

Chicago-based The Boeing Co. said Wednesday that its first-quarter profit fell because of its previous decision to cut production rates in response to a drop in new airplane demand.

The company forecast that commercial airplane prices would fall and lowered its forecast for the full year.

First-quarter earnings per share of 86 cents missed Wall Street expectations. Analysts on average had been expecting 91 cents per share, according to a compilation on Yahoo Finance.

“The expanded global economic downturn is presenting unprecedented challenges in our commercial airplane markets,” Boeing Chief Executive Officer Jim McNerney said in a statement. “We believe we are better positioned than most companies to withstand the ongoing pressures of this economy, and we are not hesitating to take necessary actions to preserve our financial strength and maintain our ability to invest and grow for the long term. Performance across the overwhelming majority of our programs remains solid, and we are making progress toward our milestones on the 787 and other important programs.”

Revenue for the quarter that ended March 31 increased 3 percent to $16.5 billion.

The company reported a profit of $610 million, or 86 cents per share, compared with $1.21 billion, or $1.62 per share, during the same period last year.

The company’s backlog at the end of the quarter fell 4 percent to $339 billion — which the company attributed to “run-off of backlog through revenues, the lower price escalation forecast and previously announced 787 cancellations.” The backlog was partially offset by the defense unit’s new orders for C-17 and integrated logistics.

The company affirmed that it would deliver between 480 and 485 airplanes in 2009 — which means the company is “sold out.”

Regarding proposed Pentagon budget cuts, Boeing said that it “will be evaluating the defense budget as it progresses through Congress to determine the potential future effects on our business outlook. The company has been anticipating changes in the U.S. defense budget for some time.”

Boeing said it would increase its focus on international defense and “pursuit of adjacent markets in the U.S.”

The Boeing Co.’s future did not become any less clouded Wednesday when the company reported first quarter earnings because uncertainty remains about airplane deliveries, possible job cuts and defense spending cuts.

The aerospace giant is being buffeted by the global economy and three primary recession-related headwinds: First, fewer people are flying as a result of the recession, and thus demand for new jets is falling. The world economy is slowing and thus, cargo demand has fallen — also affecting new jet orders. And finally, tighter credit markets makes financing for new planes more difficult to obtain.

On top of that, the U.S. Defense Department has ripped its steady rug of spending out from under the company with a budget proposal that affects Boeing’s defense division more than any other defense supplier.

Top executives assured investors Wednesday that the corporation still has a bright and solid future, but Boeing would not give a forecast for 2010, even though in the first quarters of 2007 and 2008, the company had provided its outlook for 2008 and 2009, respectively. (Boeing said it would provide a 2010 forecast later in the year.)

“Fundamentally, this is a solid company with strong core businesses,” McNerney said, repeating a message he’d delivered in January, and adding, “We are facing economic times that are more difficult than many of us have ever seen.”

Boeing’s first-quarter profit fell nearly 50 percent because of its previous decision to cut production rates in response to a drop in new airplane demand. The company reported a profit of $610 million, or 86 cents per share, compared with $1.21 billion, or $1.62 per share, during the same period last year.

First-quarter earnings per share of 86 cents missed Wall Street expectations. Analysts on average had been expecting 91 cents per share, according to a survey by Thomson Reuters.

Revenue for the quarter that ended March 31 increased 3 percent to $16.5 billion.

Boeing’s customers in most cases aren’t going away, they are just deferring orders, McNerney said.

The company accommodated about 60 airplane deferrals in the first quarter for future deliveries, and is working on more deferrals across all regions on all models, McNerney said. The only commercial airplane cancellations this year have been 32 787s.

The company forecast that commercial airplane prices would fall and lowered its 2009 profit forecast to between $4.70 and $5 per share. Before, the company had expected $5.05 to $5.35 per share.

Earlier this month, Boeing said it would cub back on 777 production starting in June 2010, and maintain production of its 747-8 and 767 aircraft. While 747-8 and 767 production is not slowing, it is also not rising as originally projected.

How do future production slow downs affect Boeing’s profit now? The answer is in the fact that for much of Boeing’s 747 backlog, the company expects that costs will exceed revenue. (As of March 31, Boeing had a backlog of 110 747 orders.)

“Since the 747 program is already in a loss position, whenever you have a decision or an event that changes the cost structure of a program that’s in a loss position already, you have to absorb all of that change immediately,” Todd Blecher, Boeing spokesman in Chicago, explained.

“Investors are going to remain a little skeptical on Boeing and its outlook until there is a little more clarity on three items,” Jacobs said, citing the status on key defense programs, production rates for 2010 and 2011, and 787-program delivery.

Jacobs expects further production cuts will be announced for 2010. He also doubts that Boeing will deliver its first 787 in the first quarter of 2010 as planned, because the date is less than a year after the first flight.

“There are a lot of what-ifs right now regarding Boeing and none of those really have to do with this first quarter earnings announcement, or frankly, what they’re gong to earn this year,” Jacobs said. “Boeing can do whatever they want this year. Everybody’s still going to be focused on 2010 and 2011.”

Also of note in Boeing news on Wednesday:

787 first flight on track

The first flight of the 787 Dreamliner, delayed about two years, is on track. The 787 is scheduled for first flight sometime in the second quarter, but there is no date.

“All the airplane systems, including engines, are cleared for first flight,” McNerney said. “We’ve also completed the structural testing on the static airframe that is required for first flight. Final analysis is underway, but the results are positive.”

Earlier this week, Boeing finished a full simulation of the first flight, which exercised all the flight controls, hardware and software.

“I’m heartened by what I’m seeing in the ramp up right now,” McNerney said of 787 production overall.

Job cuts

In January, Chicago-based Boeing said that it would cut 10,000 positions company wide this year, including about 4,500 in Puget Sound.

More cuts may be on the way –McNerney and Chief Financial Officer James Bell did not rule them out.

“We are not ruling out additional job cuts, especially in light of the production rate decisions that we already announced that will take effect next year,” spokesman Blecher confirmed after the conference call.

Blecher could not give a timeframe for when cuts may be announced.

747 timeframe changes

Boeing is pushing back first delivery of the 747-8 Intercontinental from the second quarter of 2011 to fourth quarter of 2011.

The first delivery of the 747-8 freighter remains unchanged, and is scheduled for the third quarter of 2010.

Lufthansa, the only customer for the 747-8 Intercontinental, told FleetBuzz Editorial.com that it would still take delivery of its ordered planes.

“There are no changes regarding our 747-8I order and can assure you that this order will stay as it is,” a Lufthansa spokesperson told independent aviation analyst Saj Ahmad.

Boeing boasts big backlog

Boeing boasts a $339 billion backlog, which the company points out is nearly five times its annual revenue.

The company’s backlog at the end of the quarter fell 4 percent, which the company attributed to “run-off of backlog through revenues, the lower price escalation forecast and previously announced 787 cancellations.” The backlog was partially offset by the defense unit’s new orders for C-17 and integrated logistics.

The company affirmed that it would deliver between 480 and 485 airplanes in 2009 — which means the company is “sold out.”

Watching the Pentagon

Regarding proposed Pentagon budget cuts, Boeing said that it “will be evaluating the defense budget as it progresses through Congress to determine the potential future effects on our business outlook. The company has been anticipating changes in the U.S. defense budget for some time.”

Boeing said it would increase its focus on international defense and “pursuit of adjacent markets in the U.S.”

But executives on Tuesday would not provide more detail about defense programs because Congress has the final say, and the Pentagon spending debate is far from over.

“We’ve got a pretty broad and diverse portfolio here and we think while there will be pressures, there will be opportunities,” McNerney said.

Aerospace analyst Jacobs said that Boeing cannot make up U.S. defense spending cuts by selling to other countries.

“The international opportunities are not going to make up for lost domestic opportunities. That is the bottom line,” he said.

Update: 2:57 p.m. Other links of interest:

The full text of the conference call with Jim McNerney and James Bell is provided by Seeking Alpha.

Boeing’s full quarterly report is available via a search on the Securities and Exchange Commission site, or by clicking this link.

Note: This is a seattlepi.com reader blog. It is not written or edited by the P-I. The authors are solely responsible for content. E-mail us at newmedia@seattlepi.com if you consider a post inappropriate.